If you live outside of Australia, you may not have heard of the opportunities to invest in residential Australian property. If you are an Australian, you probably already know that the aussie property market has performed well over any given 10 year period in the past few decades.
The below table shows the change in home prices between 2002 and 2011 (a 9 year period) for the capital cities of Australia.
Source: Australian Capital City Indexes
As can be seen from these statistics, if you had bought a property in any capital city (except Sydney) 9 years ago, you would have doubled your money at the very least. The 2 worst performing cities are Sydney and Melbourne who also happen to be the 2 most populated cities down under.
This period of 9 years spans a turbulent time in the world due to the Global Financial Crisis (GFC) as well as wars and disasters. Australia’s property market has performed terrifficly during this period and it is fair to assume that it will continue to do so in the future provided the growth drivers remain strong.
Affordability has always been an issue for buying a home in Australia. Often when there is a spike in property prices and no equivilant increase in average salaries, property becomes less affordable on average. The response to this will be a plateau in property prices unless the demand has been heavily driven by investors.
Some home buyers will leave the market when affordability becomes too much and others will start to adjust their expectations and maybe start searching in cheaper ares.
A large increase in interest rates can also reduce affordability. In some circumstances, interest rate rises will see an increase of people defaulting on their mortgages which in turn increases the amount of stock coming back on the market.
Where to Buy?
The capital cities are not necessarily the best performing areas in Australia and there are hundreds of regional towns and cities that have had bursts of growth during various periods. Industries such as agriculture, mining, power generation, tourism, government and military have all helped drive growth in places such as Townsville (QLD), Kalgoorlie (WA), Gladstone (QLD), Hunter Valley (NSW), The Pilbara (WA) and Port Lincoln (SA) to name just a few.
Investing in some regional areas can be riskier, such as investing in boom towns, so if you decide to invest in a growing regional area, be sure to find one that has a diversification of industries to help support jobs in the local community. The gold coast, south of Brisbane is an example of a city that has experienced dramatic growth in the past, due mostly to tourism, but is now suffering with a higher aussie dollar meaning reduced demand from international travellers (as it is now more expensive to convert currency into Australian Dollars).
If you invest in capital cities of Australia, you should do well, but you cannot assume that you will experience large growth. You should still do research and look for suburbs with higher population growth prospects. Suburbs on the fringe of capital cities can become increasingly popular when inner suburbs become too expensive and infrastructure such as new train lines, motorways or busways make these places more accessible to the CBD.
Capital Gains Tax
If you buy real estate for investment in Australia, you will be required to pay capital gains tax when you sell your property. This tax is calculated by taking 50% of the gain of your property and adding it to your gross income for that year. You will then be taxed at normal income tax rates on the adjusted gross income. For example:
If your piece of real estate was purchased for $200,000 and sold for $300,000 then your gain is $100,000.
50% of $100,000 is $50,000.
If your gross income from your job for this financial year is $70,000 then you add the $50,000 to your income of $70,000 and then declare a total income of $120,000 for the year.
Assuming that you are in the 30% tax bracket, you will end up paying an extra $15,000 in tax that year.
On the original gain of $100,000 for the property, this represents an overall capital gains tax rate of 15%. This is not a huge amount compared to the money you make on the property, but it is still a decent chunk of cash and something to be taken into consideration.
So Australia is a great place to invest your money, but it is not without it’s risks. Do not be blinded by the great average returns achieved in the past, you must still try to find growth areas to really make a successful property investment down under.